YOU ASK:

What are the 401k hardship withdrawal rules?

WE ANSWER:

401k plans are characterized by a provision which permits plan participants to make early hardship withdrawals, provided that they prove that they have "immediate and heavy financial needs", as defined by the Internal Revenue Service (IRS).

Hardship withdrawals are restricted to the amount that the employee has invested into the 401k plan and they cannot include the money earned on the amounts that have been deferred. Apart from employee contributions, hardship withdrawals might include part of the employer matching contributions, if applicable.

Acceptable Reasons for 401k Hardship Withdrawals

The following reasons are recognized by the Internal Revenue Service (IRS) as qualifying for a hardship withdrawal:

  • If the distribution is for medical expenses which are not reimbursable and have been incurred by the worker or the worker's family.
  • If the distributions are needed for funeral expenses.
  • When the distributions are used for purchasing a primary residence (that does not include mortgage installments).
  • When the plan participant needs the funds to pay any post-secondary tuition fees and expenses for any member of their family.
  • When the individual has an urgent need for the distributions in order to prevent foreclosure of their home or eviction.
  • When the plan participant needs the money to pay for repairs to their primary residence.

Hardship Withdrawal Requirements

In order for a hardship distribution to be made, the following requirements need to be satisfied:

  • The 401k distribution must not exceed the amount of the immediate and heavy financial need.
  • The 401k hardship distributions are made as a last-resort measure, i.e. the employee needs to have received all nontaxable loans and other distributions offered by the employer.
  • The employee is forbidden to make any elective deferrals or contributions to the 401k plan for six months after the hardship withdrawal is made.
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